The unprecedented rapid and multiple hikes in the Fed fund rates in an effort to combat inflation caused bonds as an asset class to register its worst performance in history.  Fortunately, the markets started to turn for the better in the middle of the  4th quarter as inflationary concerns eased and inflation readings receded from their peak in June. Long-duration corporate bonds started to stabilize and recover after hitting a multi-year high in yields.

Alongside the market recovery, we have deployed our fund’s cash holdings from 30% in the previous quarter to just around 6% by end of the year.

As we begin the new year, the concerns of financial markets shifted from inflation to recession. Even though core inflation ex-shelter in the US has fallen,  wages remained resilient, forcing a tough hand on the US Federal Reserve to maintain a tight monetary policy and pushing back expectations of the timing of a Fed pivot.  A sustained fall in rentals and wages would be needed for Fed’s inflation targets to be met and the global economy faces the risk of a deeper recession should rates remain stubbornly high for an extended period.

Looking ahead, we are cautiously optimistic, encouraged by the return of bonds as a portfolio diversifier and the higher yields. While these economic issues play out, we see a distinct investment advantage in high investment-grade quality global financials and corporate credits. They provide us with a safe harbor and shelter in volatile financial markets.

As we’ve come to the end of 2022, we wish every investor a Happy New Year & success in clipping steady coupons for 2023!

Dec 2022